Due diligence is the essential process conducted by an investor to evaluate the potential strength of a company.
Buyers conduct due diligence on the target company to know about the financial health of a company.
Therefore, a company's due diligence is generally performed before any private equity investment, business sale, bank loan funding, etc.
Due diligence Services are the detailed investigation and verification of potential deals to confirm all the relevant financial information related to it.
How to Conduct Due Diligence in a Private Company
1. Review of MCA Documents
Mostly the due diligence of a company begins with the Ministry of Corporate Affairs (MCA).
MCA website contains the master data of the company which is available to the public.
With the payment of small fees, all the documents registered with the registrar can be made available to anyone. The documents which are available:
2. Company information
1. Date of incorporation
2. Authorized capital
3. Paid-up capital
4. Date of last annual general meeting
5. Date of last balance sheet
6. Company’s status
3. Director Information
1. Directors of the company
2. Date of appointment of the company
4. Charges registered
1. The details of secured lenders of the company
2. The quantum of secured loans
5. Documents
1. Memorandum of association
2. Certificate of incorporation
6. Review of Article of association
To ascertain the procedure for the transfer of shares, it is very important to review the article of association. As it contains the details about the equity share and the voting rights. Therefore, during the due diligence process review article of the association.
7. Assessment of statutory registers of the company
Under the Companies Act, 2013, a private company must maintain various statutory registers with reference to sharing allotment, share transfer, board meetings, the board of directors, etc.
Therefore, during due diligence, a company's statutory registers must be reviewed to collect and validate the information about the directorship and shareholding.
8. Review of books of accounts and financial statements
The companies must maintain books of accounts along with detailed transaction information under the Companies Act. 2013. Hence, detailed financial information must be audited and verified. Some of the relevant matters during the process of due diligence are:
1. Verification of bank statements
2. Verification and valuation of all assets and liabilities
3. Verification of cash flow information
4. Verification of all financial statements against transactional information
9. Review of Taxation Aspects
The taxation aspects of a company must be rigorously checked during the process of due diligence as it helps to ensure that no unforeseen/ unexpected tax liabilities are created on the company on a future date. The following aspects must be checked relating to the taxation aspects:
1. an income tax return filed
2. Income tax paid
3. The calculation of income tax liability by the company
4. ESI / PF Returns Filed
5. ESI / PF Payments
6. ESI / PF Payment Calculation
7. GST/ Service Tax / VAT Returns Filed
8. GST/ Service Tax / VAT Payments
9. The basis for GST/ Service Tax / VAT Payment Calculation
10. TDS Returns
11. TDS Payments
12. TDS Calculations
10. Review of legal aspects
A legal audit of a company must be performed by a certified legal practitioner to discover any pending legal actions or suits by or against the company. The following aspects are to be checked during the legal due diligence process:
1. Legal due diligence for all real estate properties of the company
2. No objection from Secured Creditor for transfer of the company
3. Verification of court documents and court filings, if any
11. Review of operational aspects
During the process of due diligence, it is very important to understand the business model and operations of the business. The following aspects must be covered during the process:
1. Business Model
2. Number of Employees
3. Machinery Information
4. Vendor Information
4. Number of Customers
5. Utilities
6. Production Information
12. Documents required for Due Diligence of a Company
1. Memorandum of association
2. Articles of association
3. Certificate of incorporation
4. Shareholding pattern
5. Financial statements
6. Income tax returns
7. Bank statements
8. Tax registration certificates
9. Tax payment receipts
10. Statutory registers
11. Property documents
12. Intellectual Property Registration or Application Documents
13. Utility Bills
14. Employee Records
15. Operational, Legal, and other documents
13. Checklist for Due Diligence of a Company
Accounting and Financial:
1. Coordinating with the internal and outside auditors.
2. It refers to any update in the financial statements.
3. You should also review assets, liabilities, accounts receivable, accounts payable, etc.
Tax:
1. Check the income tax status, and any deviation.
2. If there are any tax issues, address them.
Sale and marketing:
1. Review the list of products and services offered by the company. Also checks the competitors of a company.
Intellectual property:
1. Evaluate the seller’s intellectual property.
2. Reviewing patents, if any
Insurance considerations:
1. Determining any need for change in the insurance policy.
2. Schedule all the insurance policies of a company.
Litigation:
1. Checks the existing litigation and anticipates the new litigation.
2. Review any of the settlement documents regarding litigation.
Real estates:
1. Make a list of the personal and real property of a company.
2. Also, prepare the disclosure of the condition of the property and problems relating to it.
Employee benefits:
1. Consider whether a retention plan should be adopted, and for which groups of employees.
2. If any employment agreement exists, review them.
3. They are determining whether new employee agreements are appropriate or not.
